Investment flows now measure market disruption
Back in 2018, Sam Altman – by then already the CEO of OpenAI – gave a talk on how to succeed with a startup. Facing him was an audience of eager founders, but he fixed his gaze on the camera, directing his message to the world at large.
On the business of picking a market, here's what he says:
"Another thing that startups need to look for is a market that has either started to undergo or is soon going to undergo exponential growth. For some reason, people don't think about markets this way.
But if you think about the most important startups, they are the ones that start in small markets that are growing very, very quickly. If you only think about the TAM (total addressable market) today, you'll make a big mistake.
What you really want to do is identify a market that's going to grow every year and be able to ride that up elevator."
It would seem this has nothing to do with asset management. It's easy to believe that since investment management is old, it's also slow to change. That the industry is sturdy.
Well, this week Abrdn announced selling its Aberdeen office and cutting 500 staff. Its Scottish rival Baillie Gifford also just announced plans for laying off dozens of employees as part of a cost review. Ten days ago, Financial News reported that Liontrust, Rathbones, Brooks Macdonald are all bleeding assets, and it was only three weeks ago when T.Rowe Price reported 11 consecutive months of outflows.
According to Morningstar data, in 2023 net flows for mutual funds were negative in every single month. They just got more negative as the year went on! Meanwhile, net flows for active ETFs were positive every single month. Yes, they're starting from a low base, but the curve is bending up.
If you just got laid off from Abrdn, which side of the industry would seem like a better bet?
Sure: not all mutual funds will die. And ETFs aren’t a guaranteed success. But the long-term trend is clear, and companies in the industry can do one of two things:
Either they stick to what they know and bet the house on winning a share of an-ever decreasing pie; or they learn to play in the new market, and capture AUM with exchange-traded products (ETPs).
I hear you saying: easier said than done. So let's first look at why this is so hard, and then at what, nonetheless, can be done.
The Abrdn story featured two striking facts about the company's woes:
The cost-to-income ratio was 82% in 2022, and is proving hard to lower.
The company is made up of three parts: asset management, advisers and retail. The retail and adviser platforms are profitable. The investments division made just £26mn of operating profit on the £367bn of mostly actively managed assets in the first half of 2023.
In the traditional model, clients deal directly with the asset manager. Meaning companies must have an entire infrastructure to support this. That's expensive, and difficult to slash once you're already serving clients this way. The traditional model is beholden to these fixed costs.
The other cost factor is collecting AUM. Last week, Citywire Amplify published the results of a survey on what fund houses pay their sales staff. Staff are rewarded based on AUM they bring in and the amount of meetings they score with clients.
The average pay for UK salespeople was £230,847, which is up from last year. While most fell into the £100,001 to £150,000 bracket, a few top earners made over £1 million.
With ETFs, the fees are lower, so the old, intensely high-touch model can’t sustain itself.
For example, JP Morgan Asset Management launched this week three active US equity ETFs. Yes, it’s doing things differently by blending existing strategies and combining different investment teams. The real question is: are they also changing their approach to sales?
I think it's critical for investment managers to learn the marketing playbooks of selling ETPs. The history of passives means some companies have had a head start in mastering how to push products at a lower cost base.
The market for active ETFs is nascent but growing rapidly. It will definitely eat away at existing active products. It’s a good market to enter…but it plays by different rules.
Treasure Corner: Influencing Buyers
This week the CFA Institute published its findings on "finfluencer" social media content. They conducted a study in which they assessed 110 pieces of video content (from YouTube, TikTok, and Instagram).
Across the content reviewed, 45% of the content offered guidance, 36% included investment promotions, and 32% included investment recommendations. The investments being recommended were individual stocks, followed by index trackers, followed by ETFs.
The data sample is frustratingly tiny, but it shows that whenever there’s more content, there’ll be more product pushing.
This chimes with a brilliant 2022 study titled Distribution Channels and Financial Advertising in the Italian Asset Management Market. As the authors (Riccardo Ferretti, Emanuela Giacomini and Francesca Pancotto) explain:
“Italy is an excellent laboratory in which to study the influence of the distribution channel given that:
(i) retail investors exhibit a low level of financial education that can amplify the role of market sentiment in their investment decisions; and
(ii) Mutual funds and ETFs have quite different distribution networks: MFs are sold to customers mainly through bank branches and tied-in agents, while ETFs are mainly bought directly by investors through online trading platforms.”
The authors collected a database of advertisements for ETFs and mutual funds in the Italian press. And they asked: does the number of ads change in line with market sentiment? For example, when the market is riding high – are there more ads?
What they found was that ETF ads follow investor sentiment, while mutual fund ads are unaffected. Because mutual funds are sold through advisors, banks mete out their advertising in a steady fashion. With ETFs, when the market is looking good there were lots more ads.
Also Happening
While on the topic of Finfluencers, the Inverse Jim Cramer Tracker ETF is shutting down after 11 months. Its twin, the Long Cramer Tracker, which was betting on the stocks that Cramer recommends, shut after just five months. In what can only be described as destructive altruism, Tuttle Capital Management launched both to prove that Jim Cramer can't pick stocks. The intent, I guess, was to gather assets and then lose money? According to Matthew Tuttle:
“We started to point out the danger of following TV stockpickers, Jim Cramer specifically, and the total lack of accountability.”
City minister Bim Afolami is urging young investors to step away from crypto and buy shares in Natwest instead. Afolami is happy that young investors show willingness to take risks; he’s upset they're not showing it to boring British banks like Natwest. The government, which currently still holds a 37% stake in Natwest, plans to offload its remaining stake to the public. In the process, it’s hoping to stimulate retail investment and revive London’s market.
Retail investors that hold a self-invested personal pension plan (SIPP) are much more likely to monitor how their pension is doing. We talked last week about segmenting retail audiences by the holdings of their portfolios. Along similar lines, a survey of 2,000 adults commissioned by InvestEngine found that over a third of adults with a workplace pension do not actively engage with their retirement fund, while 81% of people with a workplace pension and a SIPP described themselves as engaged with their pension's performance.